Cutting business ties with Russia will cause financial losses – and in some cases, the amount involved can be staggering. Companies will likely look for ways to recoup some of these losses, and this Reuters article notes that one source may be political risk insurance. While standard insurance policies don’t cover extraordinary events like the fallout from Russia’s invasion of Ukraine, the article notes that $1 billion of political risk insurance was issued in 2020 alone for companies with Russian operations.
Unfortunately, having a political risk policy doesn’t mean that companies withdrawing from Russia will necessarily have a claim under it. This excerpt explains:
Companies that leave and abandon their business without any action taken by the Russia government to seize control of their assets will have a tough time collecting insurance, according to legal experts. “You see companies saying ‘we’re leaving because we support Ukraine.’ The question is then whether the policy covers a voluntary departure,” said Micah Skidmore of the law firm Haynes and Boone. Insurers are most likely to pay claims for revenues earned in Russian roubles that are no longer convertible to foreign currency, said legal experts.
The article says that additional actions by Russia that could support claims under political risk policies include asset seizures and nationalization of industries – all of which appear to be on the table.
One thing about the SEC’s climate change rule proposal seems pretty certain – if the rules are adopted in their current form, they are going to face legal challenges. On what grounds might the validity of the SEC’s climate change rules be subject to attack? This excerpt from Davis Polk’s recent blog on the rule proposal provides some insights:
Challenges to the SEC’s statutory authority. Nothing in the federal securities laws expressly authorizes the SEC to require the disclosures contemplated by the proposal. Instead, these laws generally permit the SEC to require disclosure that is “necessary or appropriate in the public interest or for the protection of investors.”
One of the SEC’s central arguments in support of its authority is that many investors—including certain large institutional investors—have expressed a desire to receive climate-related disclosure. However, public interest alone may not be enough to meet the statutory threshold, if a hypothetical “reasonable investor” would not find the required disclosure necessary for investment or voting purposes. This may also make it more difficult for the SEC to demonstrate that it has met its obligation to show that the benefits of the new requirements outweigh their costs.
This challenge is likely to be bolstered by the “major questions” doctrine, which provides that agency rules of major significance be the subject of a clear delegation of Congressional authority (and was relied on by the Supreme Court to nix the Biden Administration’s COVID-19 vaccine and eviction moratorium policies).
First Amendment challenges. The proposal is also likely to be challenged as violating the First Amendment, by compelling speech. This topic has received close scrutiny by the Supreme Court in recent years in other cases involving corporate speech.
If you’re looking for more information on the “major questions” doctrine, check out this Arent Fox Schiff memo. As to the First Amendment issues, Liz blogged last year about a letter from West Virginia’s AG threatening to bring an action on that basis against any ESG-related rulemaking by the SEC and you can check that out for more details on the First Amendment argument. Meanwhile, this post on the Business Law Prof Blog lays out an argument supporting the validity of the proposed rules.
Last week, the SEC announced that Martha Legg Miller, the Director of its Office of the Advocate for Small Business Capital Formation (OASB), will leave the agency at the end of April. She’s served as the OASB’s Director since it was first established in 2018, and this excerpt from the SEC’s announcement provides some of the highlights of her tenure:
During her tenure, she oversaw the development of novel educational resources to empower entrepreneurs – such as the centralized Capital Raising Hub, Navigator decision tool, Capital Trends Maps, and Cutting through the Jargon glossary. Ms. Miller’s leadership of the Office also helped increase the visibility and accessibility of SEC rulemakings through video summaries, collaboration on policy work across the agency, and engagement in year-round outreach events to elevate the voices of underrepresented entrepreneurs and investors. OASB also launched the SEC’s Small Business Capital Formation Advisory Committee, piloted digital solutions to increase public participation with the SEC’s annual Small Business Forum, and crafted annual reports to Congress.
The OASB’s current Deputy Director, Sebastian Gomez Abero, will serve as Acting Director after Martha Legg Miller’s departure.
Join us tomorrow at 2 pm eastern for the webcast – “Conduct of the Annual Meeting” – to hear General Mills’ Ben Backberg, Broadridge’s Dorothy Flynn, Juniper Networks’ Mary Catherine Malley, Capital One’s Vernicka Shaw, and the one & only Carl Hagberg, Independent Inspector of Elections and Editor of The Shareholder Service Optimizer, provide insights on investor expectations as well as practice pointers on meeting format & logistics, tricky vote tabulations, officer & director participation, and rules of conduct.
If you attend the live version of this 60-minute program, CLE credit will be available. You just need to fill out this form to submit your state and license number and complete the prompts during the program.
Members of TheCorporateCounsel.net are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. If you’re not yet a member, subscribe now by emailing sales@ccrcorp.com – or call us at 800.737.1271.
Yesterday, the SEC announced an open meeting for Monday, March 21st. According to the Sunshine Act Notice, there’s just one item on the agenda:
The Commission will consider whether to propose amendments that would enhance and standardize registrants’ climate-related disclosures for investors.
Climate change issues have soaked up a lot of oxygen at the SEC in recent years, and the open meeting comes on the heels of reports that there’s trouble in paradise among the Democratic commissioners concerning the scope of the rule proposals. Will the proposal track the expansive approach championed by Commissioner Lee, or will we end up with something more grounded in traditional conceptions of materiality? We’ll find out soon.
We continue to see a tremendously positive reception to our new membership site, PracticalESG.com. Thank you to everyone who’s signed up so far!
In the first few weeks of being live, we’ve continued to build out our organized content library with practical checklists and analysis – and we’ve held the following webcasts for members:
The SEC’s upcoming climate change disclosure proposals are yet another example of the increasing importance of ESG issues to public companies & their investors. Don’t miss out on our one-time promo event for this essential resource! Today is the final day of our offer for 25% off the regular subscription pricing. You can sign up online – or email sales@ccrcorp.com today or call 1-800-737-1271 – to take advantage of this one-time promo event and get tools to make your ESG efforts easier & more successful.
Last year, Liz blogged about the Alliance for Fair Board Recruitment’s lawsuit challenging Nasdaq’s board diversity disclosure rule. Late last month, the CII filed an amicus brief along with a group of institutional investors & other organizations in support of the rule. Here’s the CII’s statement on the filing of the brief, which appears on the homepage of its website:
On February 25, CII and seven other groups filed a joint amicus brief in support of the SEC in a lawsuit challenging the agency’s approval August 6 of Nasdaq rules that require companies listed on the exchange to disclose diversity statistics on their boards of directors. The brief, filed in the U.S. Court of Appeals for the Fifth Circuit, argues that many investors and investment advisors believe board diversity is a material benefit to companies and consider board diversity—or the lack of it—when casting votes for directors who serve on the nominating and governance committee. Other organizations co-signing the brief are: Ariel Investments; Boston Trust Walden; Gaingels; the Investment Adviser Association; Lord, Abbett; Northern Trust Investments; and the Robert F. Kennedy Center for Human Rights.
The CII’s action follows on the heels of the decision of 17 states to file an amicus brief opposing the rules in late January. This CFO Dive article has additional details on that filing.
Yesterday, the SEC announced that it was proposing a series of new rules focusing on enhanced disclosure of cybersecurity issues by public companies. Here’s the 129-page proposing release and here’s the 2-page fact sheet. The proposed rules would require current reporting & periodic updating about material cybersecurity incidents, and periodic disclosures about policies and procedures to address cybersecurity risks. In addition, companies would be required to disclose management’s role in implementing cybersecurity policies & the board’s cybersecurity expertise. This excerpt from the fact sheet spells out the specifics, and notes that the SEC proposes to:
– Amend Form 8-K to require registrants to disclose information about a material cybersecurity incident within four business days after the registrant determines that it has experienced a material cybersecurity incident;
– Add new Item 106(d) of Regulation S-K and Item 16J(d) of Form 20-F to require registrants to provide updated disclosure relating to previously disclosed cybersecurity incidents and to require disclosure, to the extent known to management, when a series of previously undisclosed individually immaterial cybersecurity incidents has become material in the aggregate and amend Form 6-K to add “cybersecurity incidents” as a reporting topic;
– Add Item 106 to Regulation S-K and Item 16J of Form 20-F to require a registrant to: Describe its policies and procedures, if any, for the identification and management of risks from cybersecurity threats, including whether the registrant considers cybersecurity as part of its business strategy, financial planning, and capital allocation; and require disclosure about the board’s oversight of cybersecurity risk and management’s role and expertise in assessing and managing cybersecurity risk and implementing the registrant’s cybersecurity policies, procedures, and strategies;
– Amend Item 407 of Regulation S-K and Form 20-F to require disclosure regarding board member cybersecurity expertise. Proposed Item 407(j) would require disclosure in annual reports and certain proxy filings if any member of the registrant’s board of directors has expertise in cybersecurity, including the name(s) of any such director(s) and any detail necessary to fully describe the nature of the expertise.
Commissioner Peirce dissented from the proposal. In her dissenting statement, she argues that “the governance disclosure requirements embody an unprecedented micromanagement by the Commission of the composition and functioning of both the boards of directors and management of public companies,” and that the granular nature of the proposed disclosure requirements makes them “look more like a list of expectations about what issuers’ cybersecurity programs should look like and how they should operate.”
The criticism of the rule as “micromanagement” of governance may be a fair comment, but if Commissioner Peirce thinks that kind of thing is unprecedented, she may want to take another look at what governance disclosures are already required by Item 407 of S-K. In any event, the comment period will end 60 days following publication of the proposing release on the SEC’s website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.
Yesterday, the SEC’s Acting Chief Accountant, Paul Munter, issued a statement addressing the assessment of materiality in the context of errors in financial statements. The statement reviews the applicable requirements and addresses some of the Staff’s concerns about how issuers approach correcting errors based on recent interactions.
In particular, the statement notes that the Staff has observed that “some materiality analyses appear to be biased toward supporting an outcome that an error is not material to previously-issued financial statements, resulting in “little r” revision restatements.” One of the areas that the statement specifically calls out is the need for greater objectivity in assessing qualitative materiality:
One area where the staff in OCA have observed an increased need for objectivity is in the assessment of qualitative factors. The interpretive guidance on materiality in SAB No. 99 speaks to circumstances where a quantitatively small error could, nevertheless, be material because of qualitative factors. However, we are often involved in discussions where the reverse is argued—that is, a quantitatively significant error is nevertheless immaterial because of qualitative considerations. We believe, however, that as the quantitative magnitude of the error increases, it becomes increasingly difficult for qualitative factors to overcome the quantitative significance of the error.
We also note that the qualitative factors that may be relevant in the assessment of materiality of a quantitatively significant error would not necessarily be the same qualitative factors noted in SAB No. 99 when considering whether a quantitatively small error is material. So it might be inappropriate for a registrant to simply assess those qualitative factors in reverse when evaluating the materiality of a quantitatively significant error. Such a scenario highlights the importance of a holistic and objective assessment from a reasonable investor’s perspective.
There’s a lot to digest in this statement, but one takeaway is that it’s yet another indication that the Staff has cast a gimlet eye on the growth in “little r” restatements over the past decade. Along those lines, the statement points out that while some attribute the trend toward little r restatements primarily to improvements in ICFR & audit quality, the Staff continues to monitor this trend in order to understand “the nature and prevalence of accounting errors and how they are corrected.” In other words, if you conclude that a little r restatement is sufficient to correct an error, you can expect a lot of questions from the Staff if your filings are pulled for review.
The January-February issue of The Corporate Executive has been sent to the printer (email sales@ccrcorp.com to subscribe to this essential resource). It’s also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in the “remote work” environment. The issue includes articles on:
– Key Trends in the Usage of Equity Awards
– SEC Reopens Comment Period for Pay Versus Performance Rules
– Proxy Plumbing Progress: A Look at Vote Confirmation this Proxy Season
